Good vibrations

Many private investors are more than capable of managing their own investments and there is no reason why they shouldn't make a success of it. For most, however, markets are increasingly complex and the appointment of a professional firm to manage their investments should provide a layer of comfort, while hopefully adding value to long-term performance.

What principles should we apply to managing private wealth? Here are our top five. They may sound simplistic, but they are easily forgotten:

1. Always put yourself in your clients' shoes. What are they thinking and what are they worried about? Experience will bring that vital sixth sense of knowing when to put a call into a client before they call you.

2. Investment: join our club. Investment is exciting and full of opportunity. Give clients a sense of your enthusiasm, provide ample opportunity for them to take an interest through interactive seminars, meetings with your wider investment team and even presentations from the management of smaller companies in their portfolio.

3. Communication. Keep it simple and jargon free. Be especially proactive in difficult markets and never go into hiding when the going gets tough.

4. A shared understanding of risk. Everyone has a different concept of risk: underperforming a benchmark, market volatility or losing capital. Make sure you have a common understanding of risk with each client.

5. Continuity. High staff turnover is a major irritation for clients and can cause a loss of confidence. Make sure every client has a small team with whom they are familiar and comfortable, so that if a change becomes unavoidable, the transition will be seamless.

Market opportunities in 2016

We are in the second phase of the most extraordinary financial experiment undertaken by central banks in living memory. Quantitative easing (QE) was started by the US and UK authorities immediately after the credit crunch in 2008, in an effort to kick-start the failing global economy. The UK and US have suspended QE, but the European and Japanese central banks are printing new money at a rate of c. €60bn per month and ¥80trn per annum, respectively.

The long term impact of QE is uncertain, but like it or loathe it, it has a positive impact on the price of real assets (e.g. equities, property and land). When combined with ultra-low interest rates, it forces the private sector to ask the question, 'Where can I invest surplus cash to generate a return better than inflation?'

Government bond yields in the major currencies are at historic lows and do not attract us other than as a capital anchor, should the financial system suffer another shock. For that reason alone,
we need some exposure to the asset class for diversification purposes. The fact that one has to lend money to the German and Swiss governments for five and 10 years respectively, before their bonds pay a positive rate of interest is a sobering thought.

We favour a mild bias towards strongly cash generative multinational equities. There is no room for complacency about equity valuations after five years of stock market recovery; however, some allowance should be made for the abnormal collapse in corporate profits in 2008/09. With interest rates effectively at zero, corporate cash flows deserve to be more highly rated than in a normal economic cycle where rates would be much higher.

Companies have emerged from the financial crisis leaner and are generating more free cash flow than at any stage for a generation. In this low interest rate environment, we feel comfortable locking into these cash flows and benefitting from dividend increases consistently ahead of inflation, but a global perspective is vital.

British companies have a long history of returning cash to shareholders via dividends, which means they are already paying out much higher percentages of profits than their peers in other parts of the world. American, European and Japanese companies have all started to embrace the dividend culture and we see much greater potential for income growth in overseas markets, especially in the event of a general slowdown.

So, our view is to think globally, favour liquid investments and focus on dependable sources of cash flow in what promises to be a low interest rate environment for some time to come. 

Jamie Black is head of private clients at Sarasin & Partners